Question 3: Discuss whether monopolies always lead to an increase to inefficiency?
Monopolies, in economist mind they are bad, however, not all things that monopolies do are bad, and they also bring benefits along side the negative effect.
First, monopolies have an advantage of research and development. Monopolies can achieve supernormal profit, as they can set high price to a certain product, this can be used to fund high cost capital investment, such as machinery, technology development… And successful research can be used to improve products and lower cost. Without the power of monopoly, there maybe less development in products. Furthermore, since monopolies don’t have any competition, monopolies can avoid duplication and reduced the waste in resources. Also, a monopoly can used price discrimination which benefits economically weaker positions in society, for example, Indian railways give discount to students travelling in its network. Because monopoly producers are often supplying goods and services on a very large scale, they may be better placed to take advantage of economies of scale – leading to a fall in the average total costs of production. These reductions in costs will lead to an increase in monopoly profits but some of the gains in productive efficiency might be passed onto consumers in the form of lower prices.
However, it is not always that monopolies bring benefits; there are also some factors that make monopolies a huge disadvantage in the market economy. The first and major factor is the high price, a monopoly market is best known for charging very high prices. There are no competing products and as a result the consumer gets a “force deal” in terms of quantity, quality and pricing. The firm may find it easy to produce inferior goods if it wishes because in the end of the day they know very well that the items will be purchased as there are no competing products for the already available market. As benefits, price discrimination can also be a disadvantage, monopolies are sometime known for price discrimination where they charge different price for different type of customers. Also, monopolies create fewer choices for the customers in a market as it doesn’t have competitors, or it already destroyed them all.
Monopolies bring very bad effects to the economy and tend to be stopped by the government. But it is not true that monopolies always bring inefficiency to the market, there are advantages that comes with monopolies, too.